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Prepared for a "no deal" outcome?

Are you prepared for a “no deal” outcome?

Firms need to prepare for a “no deal” outcome, time is rapidly running out

Firms need to prepare for a “no deal” outcome, and time is rapidly running out.

It is not yet certain what will happen as a result of Tuesday’s decision by the UK parliament not to accept the EU-UK withdrawal deal. It does, though, underline that firms need to take practical steps to manage a possible “no deal” outcome, and time is rapidly running out.

Absent a deal, and therefore no transition period, EEA firms and funds operating, providing services or marketing funds in the UK will be able to benefit from the UK’s temporary permissions regime (TPR) provided they notify the UK regulator(s) by 29 March, exit day. See here and here for more details. Firms should also consider whether they need to apply for new or extended UK permissions before exit day, although time is now very short for that route.

For those EU27 firms that do not wish to join the TPR and intend to wind down their business in the UK, the Financial Services Contract Regime (FSCR) will enable them to continue to service existing contracts for up to five years (or up to 15 years for insurance contracts) – more detail below. If firms are unsure whether they fall within the FSCR, the FCA recommends they seek legal advice. In particular, if a firm considers that it will require more flexibility than is available under the FSCR, it should consider submitting a notification under the TPR. KPMG legal experts can advise.

UK firms operating, providing services or marketing funds in EU27 member states will need to determine whether any national arrangements are available. At present, only Germany and the Netherlands are introducing something similar to the UK TPR. France is introducing provisions that will enable UK firms with contracts with French counterparts to continue to service those contracts for a period, similar to the FSCR. For UK funds, some Member States have private placement regimes but they are not generally as flexible as the UK’s regime.

All firms need urgently to consider the options available to them and to act. Also, any EEA-based firms that choose to enter the UK TPR, to apply for new or extended permissions, or to use the FSCR will need to be able to come into compliance with rules that do not currently apply to them, including the FCA’s Principles for Businesses. Please contact KPMG for further information.

The Financial Services Contract Regime

The UK Government published at the end of last year the draft legislation that will enable the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to operate the FSCR. On 8 January, the FCA published a consultation paper on its approach to the FSCR (CP19/2).

In a no-deal/no-transition scenario, the FSCR will ensure that firms can still fulfil their existing contractual obligations in the UK for a limited period of time, even if they are outside the TPR. This will allow EEA-based firms to run-off pre-Brexit contracts with UK persons (individuals or legal entities) and conduct an orderly exit from the UK market. Firms that have not submitted a TPR notification or are unsuccessful in securing full UK authorisation through the TPR route will automatically enter the FSCR, but will have to take certain actions, including compliance with UK rules that do not currently apply to them.

FSCR firms will not be able to write new UK business but they will be able to continue carrying out regulated activities that are required to service pre-existing contracts. Firms will be able to use this regime for up to five years after entry into the FSCR (whether they enter on exit day or after having been in the TPR for a period of time), or up to 15 years for insurance contracts.

The actions permitted are limited to regulated activities related to:

The performance of a contract entered into before exit day (or, where the firm enters the regime after exit from the TPR, before entry into the regime);

The transfer of business represented by contracts to UK authorised firm(s) as part of the run-off process; or

Managing financial risk (within specified parameters).

FSCR firms will be categorised into two discrete groups – supervised run-off (SRO) or contractual run-off (CRO) – but the UK regulators will have the ability to move firms from one group to the other where appropriate.

EEA firms managing UK-authorised funds will not be able to continue to manage those funds under FSCR after exit day. Also, EEA-domiciled investment funds that are currently marketed into the UK will not be able to be marketed into the UK under the FSCR. These firms and funds will need to notify under the TPR.

Supervised run-off (SRO): EEA firms with UK branches or top-up permissions in the UK that do not submit a TPR notification, and firms that entered the TPR but did not obtain full authorisation (“SRO firms”), will need to remain authorised by their home state and to comply with the same requirements as TPR firms:

All FCA rules that currently apply to them.

All FCA rules derived from an EU directive and that are currently reserved to the SRO firm’s home state and which the FCA does not currently apply to EEA firms (home state rules). However if firms can demonstrate they continue to comply with the equivalent home state rules in respect of their UK business they will be deemed to comply with FCA rules (“substitute compliance”).

Contribute towards the periodic fees of the annual funding requirements.

Contractual run-off (CRO): remaining incoming EEA services firms will automatically enter CRO if they have not submitted a TPR notification but have pre-existing contracts in the UK that would require UK permissions to service them. CRO firms will remain supervised by their home state regulators and will rely on an exemption to the general prohibition of section 19 of FSMA, provided

Remain authorised by their home state regulator.

Comply with the home state regulator’s requirements.

Disclose to the FCA that the firm is in CRO.

Pay a Special Project Fee if the FCA incurs exceptional supervisory costs.

Pre notification is not required, but firms are required to notify the FCA after entry into CRO, as soon as reasonably practicable, that the firm is carrying on a regulated activity in the UK. To continue to benefit from the exemption, CRO firms must maintain their home-state authorisation and inform the FCA if that authorisation is varied or cancelled.